Our website uses cookies and other technologies so that we can remember you and understand how you and other visitors use our website. By continuing to browse this Site, you are agreeing to our use of cookies. Click here for more information on our Cookie Policy, including how you may control the information we collect about you through cookies.
Read MoreAccept

Mid-Market Retailers Opportunity to Expand in Hong Kong

​CBRE’s Latest Report Illustrates Structural Shift in Retail Sector from High-End to Mass Market, and from Tourists to Local Spenders

Hong
Kong, September 16,
2015 – Mid-market
retail brands are set to take over luxury brands as the main driver of retail
demand in Hong Kong according to global real estate advisor, CBREin its latest Special Report – The Changing Retail Landscape: How to
Survive the Slowdown in Hong Kong?

The Hong
Kong retail sector outperformed over the last decade with strong sales growth
for high-end products. This generated an increase of 213% in average rents from
2003 to 2014 for core street shops in Causeway Bay, Tsim Sha Tsui, Mong Kok and
Central.

But the tailwind
for luxury retailers has slowed since 2014 hindered by a range of factors
including Chinese government’s anti-corruption measures, milder GDP growth in
China, weakening Asian currencies and the loosening of policies on travel for mainland
Chinese. These are all unfavorable factors for Hong Kong’s tourism and retail
sales. The total retail sales in Hong Kong from January to July 2015 edged down
by 1.8% y-o-y, while sales of watches and jewellery plunged 15% in the first
seven months of this year. Despite the gloomy outlook for the retail sector, opportunities
are emerging for mid-market retailers.

“The
retail sector is experiencing a structural change,” said Joe Lin, Executive Director, Retail Services, CBRE Hong Kong. “Over
the past decade, high-street shop landlords have reaped the benefits of strong
demand from luxury retailers and massive rental growth. Landlords must now be
more realistic on rental negotiations, as luxury retailers are adjusting their
leasing strategies to save costs, and more mid-range brands are looking to tap into
prime locations at relatively affordable rental levels. This opens the door for
mid-market brands to expand. In the last quarter, we saw prime street shops
leased to mid-market brands following the lease expiry of the previous luxury
goods retailers.”

To cope
with the slowdown, luxury retailers are consolidating their second-tier shops,
which will increase space availability in the market. Some high-end fashion,
cosmetics and watch and jewellery retailers have either stopped renewing leases
or surrendered spaces well ahead of expiry. However, they will still strive to
secure flagship premises in strategic locations with prominent addresses and good
visibility, which means a higher marketing value. They may also introduce
secondary lines at accessible prices, targeting young consumers with a growing
demand for mid-market products.

Consolidation
by luxury retailers in Hong Kong implies that the tenant composition in some
prominent retail locations will gradually change. Meanwhile, mid-range
retailers previously not able to afford to lease a space in prime locations are
now looking to take up vacant space surrendered by luxury brands. Landlords are
more willing to negotiate with tenants for more affordable terms. While rents
are generally falling, shops in the most strategic locations with good footfall
and visibility are not expected to run into high vacancy risks as long as
landlords are prepared to be flexible in leasing terms.

“The sales
performance of luxury products is heavily reliant on the external factors
mentioned,” Marcos Chan, Head of
Research, CBRE Hong Kong, Macau and Taiwan commented. “In contrast, the demand for
mid-market goods from both tourists and local consumers is relatively steady.
We foresee three trends in the next five years: (1) the main driver of demand
for retail space are shifting from high-end consumer goods to mid-market
brands; (2) local demand will gradually regain a bigger share in total retail
sales compared with tourist spending; (3) decentralized areas will provide a
significant proportion of new retail space, offering more leasing options.
These trends suggest that retail market stakeholders, including luxury and
mid-market brands, and street shop and shopping mall landlords, will have to
reconsider their business strategies.”

Local Demand Gaining Importance Along with
Shift in Tourist Spending Patterns

In the
past decade, the percentage of retail sales contributed by tourists doubled from
20% in 2004 to 42% as of 2015. This accounted for the tremendous sales growth
in tourist-oriented products, including cosmetics, jewellery and watches as well as electronic goods.
The number of cosmetics, leather goods and jewellery and watch shops grew by
1975%, 62% and 29% respectively from 2003 to 2014. Some of these retailers have
not only grown in number of shops but also the average size of their retail
premises. Since 2014, Hong Kong has seen a decline in tourist arrivals from the
mainland, and changes in tourist spending patterns from luxury to mid-range
goods.

Local retail
spending is robust but is often neglected. Local real private consumption
expenditure registered an average annual growth of 4.9% between 2004 and 2014,
and the median household income rose by 4% per annum during this period.
Domestic consumption is set to remain healthy in the short to medium term,
although short-term stock market volatility and an anticipated interest rate
hike may marginally scale back household consumption.

Retail Leasing Opportunities Emerging in Decentralized
Areas

The lack
of supply in the market is another reason for pushing retail rents to a high in
past years. CBRE believes that supply in the next five years will ease some
pressure on retailers on rental expense but new options in the core shopping
districts will continue to remain limited. The development of several new towns
in more remote districts will result in substantial growth in residential and
working populations that will need to be served with by shopping facilities. CBRE
estimates that in the next five years, 70% of the new supply will be in
non-core districts and 5.6 million sq. ft. of retail space will be shopping
arcades for residential estates. This will provide opportunities for mid-range
retailers to expand their store networks targeting the mid-to-high income households.
Government statistics suggest that the catchment areas of these regional malls
usually have an above-median household income.

“Structural
changes in the retail landscape will ultimately result in a more balanced and
sustainable retail market in Hong Kong,” said Lin. “The tenant mix of both core areas and sub-markets will become
more diverse, enabling both high-end and mid-market brands to offer a broader
range of products to consumers. Domestic spending will get retailers’ attention
and the mid-market sector will see healthy growth potential. We would recommend
mid-market retailers to continue to explore opportunities in emerging
districts. This will ensure they obtain first-mover advantage. Meanwhile,
street shop landlords should lower their rental expectations and consider
leasing to mass-market brands to avoid long-term vacancy.”

​​​​​

​​​

Disclaimer:

Neither CBRE nor its affiliated companies make any warranties or claims on the implied accuracy of the information contained herein.